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Are Private Exchanges Good or Bad for Health Insurer Profits?

An article that appeared in today’s AISHealth is saying that health insurers could see their profit margins more than double if their large employer clients transition from a self-insured model to full risk via private insurance exchanges.

The article, which was reprinted from INSIDE HEALTH INSURANCE EXCHANGES, says that the Sept. 17, announcement that Walgreen Co. would move its 160,000 self-insured employees to Aon Hewitt’s multicarrier insurance exchange has gotten the buzz started.

Over the past two decades, large employers have migrated to self-insured benefits where they assume much of the risk associated with claims. That has left insurance carriers to service less profitable administrative services only (ASO) accounts.

But, AIS notes that Citigroup Global Markets analyst Carl McDonald said In a Sept. 21 note to investors, “the single biggest structural positive we can think of for the managed care stocks is if a significant number of self-funded employers became fully insured.”

This may be true if large, self-funded employers move their employees onto fully-insured private exchanges, but what happens when smaller employer who are already fully-insured follow suit?

A white paper published by Booze & Co. on June 24, 2013, noted that small and midsized employers may beneﬁt more than larger employers from the emerging exchange models in the long run. Here is an excerpt:

Midsized companies are the most challenged by cost pressures and inﬂationary swings and suffer the greatest administrative burdens. In fact, midsized employers, most of which are “fully” insured by payors, contribute the most to the commercial insurance industry’s proﬁts. This is because their negotiating position is weak and their risk proﬁles more variable. Exchanges give these midsized employers access to greater choice for themselves and their employees, even as they create price competition for health beneﬁts and lower overall healthcare costs. In other words, not only do small and midsized employers stand to gain the most from participating in exchanges, but payors stand to lose the most.

Here is another piece of bad news:

We project that a 10 percent shift to private exchanges in the midsized- to large-group employer segment over the next ﬁve years will lower industry proﬁts by 3 to 4 percent.

This is why:

Early results from some private exchanges show that margin percentages for individual products may hold steady, but since as many as 70 percent of employees buy less expensive options, the absolute dollar contributions could decline signiﬁcantly. This revenue reduction ﬂows almost entirely to the payor’s bottom line, reducing margins in aggregate.

So, will large self-funded employers that convert to fully-insured when they join exchanges pump up carrier profits, or will the small- to medium- size employers who will come into exchanges later erode that profit by creating more pricing volatility and the purchase of lower cost insurance?